Sunday, March 19, 2017

Bullish Bets On Crude Cut By Most Ever As Price Falls Below $50

Money managers’ WTI net-long position slips to 3-month low; Wagers on a further price drop doubled as U.S. output mounts.

By Jessica SummersBloomberg

March 20, 2017

The exodus of oil-price optimists has begun.

Money managers cut bets on rising West Texas Intermediate crude by a record amount during the week ended March 14, while wagers on a further price drop doubled as oil remained below $50 a barrel.

"It’s sort of a negative feedback loop, where money managers were selling because the price was falling, and the price was falling in part because money managers were selling,” said Tim Evans, an analyst at Citi Futures Perspective in New York, in a telephone interview.

Bets on rising WTI crude during the report week were reduced by the most on record in data going back to 2006, the U.S. Commodity Futures Trading Commission announced Friday. The cuts came as prices tumbled below $50 a barrel for the first time this year, and anxious executives discussed rising U.S. rig counts at an industry meeting in Houston.

On Friday, oil settled at $48.78 a barrel on the New York Mercantile Exchange, up 29 cents for the week. Saudi Arabia and Russia sent mixed messages as the week ended on the future of the production cuts agreed to by the Organization of Petroleum Exporting Countries and 11 other nations for the first half of the year.

Saudi Arabia is ready to extend the cuts into the second half if supplies stay above the five-year average, Energy Minister Khalid Al-Falih said on Bloomberg Television. Russian Energy Minister Alexander Novak countered it was too early to discuss an extension. An OPEC panel is scheduled to meet this month to review compliance with the current deal.

‘Room To Grow’

“If you make it through this next OPEC compliance meeting and we don’t have further jawboning by the Saudis and Russia, or more compliance, I think that you have room to grow on the short side, which is worrisome,” Brent Belote, founder of Cayler Capital LLC, which manages $5 million in oil-related assets, said by telephone.

During the week ended March 14, hedge funds decreased their net-long position, or the difference between bets on a price increase and wagers on a decline, by 23 percent to 288,774, the largest decline on record and the lowest level since December. WTI tumbled 10 percent during the period. Longs fell 8.9 percent to the lowest level since early January, and shorts doubled from the prior week to the highest since November.

Producers and merchants increased their short positions, or bets on lower prices, to 739,736 futures and options during the report week, the highest level in a month.

The U.S. benchmark slipped below $50 a barrel on March 9 as oil executives gathered in Houston for the annual CERAWeek by IHS Markit conference.

Industry players at the meeting aired their concerns that growing U.S. output may thwart OPEC’s efforts to trim stockpiles and raise prices, an idea underpinned by U.S. government data released during the week showing inventories at record high levels. Many shale producers view $50 as a benchmark price for profitability.

Bets On OPEC

“The rise to record inventory levels in the U.S. is a challenge to the idea that the market has already fully rebalanced and that the downside risk is negligible," Evans said.

There’s still hope OPEC will continue its efforts to reduce the global glut. Deutsche Bank AG Thursday predicted OPEC will extend the cuts not only through the end of this year, but also through the end of 2018. Citigroup Inc. said OPEC’s output cuts aimed at easing the glut are “real” and already are cleaning up the market.

“We’re close to the $49 mark, not too far from $50,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said by telephone. “It seems like there are a lot of people who still have faith in OPEC delivering the kind of cuts that would allow prices to increase.”